Stock Options Defended

I read with great interest Ms. Werniuk’s column on stock options (p.5, “Lead by Example”, CMJ June/July 2002) and agree with her concerning interest-free loans. However, examples such as John Roth of Nortel’s $128 million win make for attention-getting headlines but are not the everyday reality of most companies, especially smaller cap companies. Therefore, I would like to offer another perspective on the question of stock options.

Stock options are usually granted at market price and in most jurisdictions are limited to 10% of the issued and outstanding shares. Since these stock options are usually granted for up to five years and the companies involved do not instantly perform, the net effect of options on share dilution is minimal. For instance, I have been president of a small public company for four and a half years. In that time period less than 4% of the growth of the company’s outstanding shares is attributable to stock options.

The few big winners have to face the high capital gains taxes in this country. So even if value accrues to the stock option, the Insider or employee often realizes only a small percentage of a stock option’s apparent value.

What is the benefit of granting stock options for a company? A junior public company is extremely limited in what it can pay and even has salaries capped by the Exchanges at pay levels that are lower than that of our public school teachers. A small company can only attract high quality people through the award of stock options. These higher quality employees increase the chances of company success, increase the efficiency of funds raised (thus minimizing share dilution) and, ultimately, increase the likelihood of an investment win for the Shareholder. These employees are willing to risk present salary for a future win on stock options. The company receives in turn the benefit of commitment and loyalty from employees who are granted stock options. Stock options, like sales commissions for salespeople, are a form of compensation that is completely consistent with the goals of shareholders. And that is share price appreciation.

The improved effectiveness of share capital employed by the more skilled human resources attracted by stock options should overcome any dilutionary effects of stock options granted. In the real world, few if any reward systems are as congruent as stock options.

E. Grayme Anthony, president Houston Lake Mining Inc. Sudbury, Ont.

More Reaction to Inco Issue

I was very interested to read your excellent coverage of Inco’s operations (CMJ April/May 2002), especially the feature on the Goro project in New Caledonia. I was personally involved during the feasibility stage.

A small comment on the introductory paragraph to “Sudbury Saturday Night”: the jackleg was introduced in the late 1940s – early 1950s, making its entry on the mining scene therefore 50 years ago rather than 100. I spent the summer in Sweden in 1951 running a jackleg drill while the older bar-and-arm drills (sometimes known as Leyners) were lying about the workings waiting to be salvaged.

Piers M. Ebsworth, Eng. (retired) Pointe-Claire, Que.